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Motivation Are the countries that joined the European Integration project better-off? Direct costs of EU membership (ok), indirect costs (???), and benefits (??) Voluminous literature on effects of single market, Euro, enlargements, trade and growth Range of estimates from Eichengreen-Boltho to Badinger: without Integration, pci Europe 5-20% lower

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Counterfactuals are key Counterfactuals and causality Wide use of counterfactuals: “EU average” and “compared to France” (“75% of EU average”) Can we improve upon these counterfactuals?

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Research Question and Method What would have been the growth rates of per capita GDP and productivity in EU countries if they had not become full-fledged EU members? Synthetic control methods for causal inference in comparative case studies or “synthetic counterfactuals” Abadie et al: AER 2003, JASA 2009, mimeo 2012

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Method: Synthetic counterfactuals A recent development in econometrics of program evaluation (Imbens and Wooldridge JEL 2009) “artificial control group” (JEL 2009, p. 79) It estimates the effect of a given intervention by comparing the evolution of an aggregate outcome variable for a country “treated” to its evolution for a synthetic control group

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More formally: Be Y an outcome variable (eg. GDP per capita). where is unknow for. Given N+1 the observed countries, with i=1 the treated country and i =2,…, N+1 the control/donor countries, Abadie et al. (AER 2003, JASA 2010) show that: for. The set of weights is with and. Thus pre-treatment: where Z is a set of covariates/predictors of Y. What is a SYNTHETIC COUNTERFACTUAL?

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Original Example: Basque GDP & ETA

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Assumptions: 1.Z should contain variables that help the approximation of Y 1t pre-treatment, but should not include variables which anticipate the effect. 2.Donor countries (i=2,…,N+1) should not be affected by the treatment. If assumptions (1) and (2) do not hold, it's likely that the estimation of the post- treatment effect is downward biased. Advantages: It allows the study of the dynamic effects. It is designed for case-study, so it can allow the evaluation of treatment independently from: i) the number of treated units; ii) the number of control units; iii) the timing of the treatment. Disadvantages: It does not allow the assessment the significance of the results using standard (large-sample) inferential techniques: only permutation tests on the donor sample (placebo experiment). SYNTHETIC COUNTERFACTUAL: Assumptions